## Non-Operating & Non-Cash Adjustments in Operating Activities
The indirect method starts with PBT (which includes both operating and non-operating items). Adjustments are needed to isolate operating cash flows.
### Category 1: Non-Cash Items → Add Back
These reduced profit but involved no cash outflow:
| Item | Direction | Reason |
|---|---|---|
| Depreciation | Add | Non-cash charge |
| Amortisation of discount on debentures | Add | Non-cash charge |
| Goodwill/intangible amortisation | Add | Non-cash charge |
| Loss on sale of assets | Add | Non-operating loss booked in P&L |
### Category 2: Non-Operating Items → Remove from Operations
These will appear in investing or financing sections:
| Item | Direction | Reclassified To |
|---|---|---|
| Profit on sale of assets/investments | Deduct | Investing activities |
| Interest income | Deduct | Investing activities |
| Dividend income | Deduct | Investing activities |
| Interest expense | Add back | Financing activities |
| Capital grant amortised in P&L | Deduct | Financing/Investing activities |
### Critical Rule: P&L Amount ≠ Actual Cash
When the amount booked in P&L differs from the actual cash received/paid:
1. Reverse the P&L amount from operating activities (add or deduct as appropriate)
2. Show actual cash in investing or financing activities
Example: Dividend received — P&L shows ₹10 (accrual basis), but cash actually received = ₹18
- Deduct ₹10 from operating (reversing the non-operating income booked in P&L)
- Show ₹18 under investing activities as cash actually received
Example: Interest paid — P&L shows ₹12,000 accrued, but actual cash paid = ₹13,042
- Add back ₹12,000 to operating (reversing the non-operating expense)
- Show ₹13,042 under financing activities as actual interest paid